Overview: FSA - toothless watchdog?

The FSA has been accused
of being a toothless watchdog following its appalling handling of the Northern
Rock collapse.

Now in a bid to get itself back on course, the regulator has made some
crucial appointments. One of the watchdog’s most significant new appointments is
that of forensic acc-ounting expert David Smith.

Smith is one of its three new senior advisers or ‘grey panthers’ as they are
colloquially referred to by the regulator.

What’s happened?

Smith, who was formerly senior partner of
KPMG Forensic
Accounting, will act as the FSA’s sounding board for accountancy matters.

Smith brings to the beleaguered regulator more than 20 years of forensic
experience of leading major financial investigations for the Bank of England and
the FSA. He also has extensive experience of audits in the oil and gas, banking
and insurance industries.

He retired from KPMG in 2003 but has stayed keenly in touch with market
movements, working on a major compliance issue for a global bank in 2007.

‘The senior advisers are appointed to give us insight into the markets that
we regulate,’ said FSA spokeswoman Teresa La Thangue. ‘They come in and talk to
us about how any policy we might be planning would be perceived and work in the
external world.’

The FSA’s recruitment of Smith is a tacit admission of how ignorant it may
have been of the accounting-related challenges facing the market participants in
the banking and financial institution sector.

The regulator’s role in the collapse of Northern Rock has been called a
‘systematic failure of duty’.

What’s going to happen?

Smith has his work cut out with the FSA. His forensic experience will
probably be key in helping the regulator understand and foresee the systemic
weaknesses of financial institutions, so as to prevent a Northern Rock-like
repeat.

Part of this will involve bringing the regulator up to speed with the issues
in the current climate of illiquid markets, resulting in assets that are
difficult to value and trade. But the challenges also concern rebuilding the
FSA’s credibility.

But there remain challenges ahead. The regulator needs to utilise the most
important skill that Smith brings to the table and take a cold hard look at
financial institutions and the way in which they have accumulated their damaging
positions. Much work is needed to formulate strategic policy, which will not
allow another contentious rescue.

As a starting point, the regulator is expected to step back, actively enforce
its rules and allow the market to correct the issues that plague some of the
financial institutions.

This might mean allowing some to die a natural death instead of rushing in
with vast quantities of taxpayers’ money to rescue them.

Taking this approach would help reinstate public confidence in the FSA’s
ability to regulate the financial services market.

But if the FSA fights shy of this sort of ruthlessness, it could cement the
perception that it is nothing more than a gummy old mutt.